Buying a Franchise in Colombia: Calculating the Break-Even Point

A franchise can report growing sales and still lose money. Before buying, you need to know what level of trading will cover the costs of your outlet, not those of an idealised operation. In franchising, the break-even point helps turn a sales pitch into a concrete question: how much do you need to sell each month to avoid operating at a loss?

1. Distinguish between breaking even, recovering your investment and cash flow

The operating break-even point is the sales level at which revenue covers the operating costs included in the calculation. It does not tell you how long it will take to recover your investment, nor does it guarantee that you will have enough cash to meet all your obligations.

Investment payback occurs when the accumulated cash flows allocated to that purpose cover your initial outlay. Cash availability, meanwhile, also depends on when you receive payments and pay bills, loan repayments, taxes and advance purchases of stock.

Ask the franchisor to distinguish between these three concepts in any presentation. If a proposal promises that you will ‘break even within a few months’, ask whether that means reaching sufficient sales to cover expenses or recovering the money you invested. These are different claims.

Also define the scope of the calculation: an operating break-even calculation based on cash costs may exclude depreciation, while an accounting calculation includes it. The two should not be presented as equivalent.

2. Classify your outlet’s costs

Build a monthly spreadsheet for the outlet you would actually buy. Use quotes and contractual terms, rather than relying solely on the franchisor’s averages.

Divide costs into three groups:

• Fixed costs: rent, property management charges, insurance, pay for your core team and other commitments that do not change immediately with sales.
• Variable costs: goods or ingredients used, packaging, transaction fees and payments calculated as a percentage of sales.
• Mixed or stepped costs: utilities with both a standing charge and usage charges, additional staff for particular shifts, or tools whose fees rise once a certain volume is exceeded.

Include reasonable pay for your own work if you will be serving customers or managing the business. Leaving it out can make an operation look profitable simply because you are working for free.

Check how payments to the franchisor are calculated and when they become due. A percentage-based royalty behaves differently from a fixed fee or a monthly minimum. If there is a guaranteed minimum payment, your model must reflect it even in months with low sales.

Use a consistent tax basis. Do not mix revenue excluding VAT with costs that include recoverable taxes. Ask your accountant to determine the treatment applicable to your business activity.

3. Calculate the threshold and translate it into operating requirements

The basic formula is:

Break-even sales = monthly fixed costs ÷ contribution margin percentage.

The contribution margin is what remains of sales revenue after variable costs have been deducted. That remainder goes towards covering fixed costs and, beyond that, generating profit.

Take these purely illustrative figures: if fixed costs were 18 million Colombian pesos (COP) and variable costs represented 60% of sales, the contribution margin would be 40%. Break-even sales would be COP 45 million per month.

With an average transaction value of COP 30,000, calculated on the same tax basis, you would need 1,500 transactions a month. If you opened for 30 days, that would mean 50 transactions a day. This is not a forecast of results: it is the operating requirement you would need to assess against the location and the business’s capacity.

Check whether you can handle that volume during peak hours. If it requires hiring another person, recalculate: your fixed costs have just changed.

Also test scenarios with a lower average transaction value, higher input costs and more sales through platforms that charge commission. If you use several sales channels, work with a justified sales mix; do not apply the margin from the most profitable channel to all of them.

4. Bring the calculation into your contract review

In Colombia, a franchise agreement is an ‘atypical’ contract: it is not governed by a comprehensive, franchise-specific legal framework. Validly agreed contractual terms apply, alongside the general provisions of the Commercial Code and, where relevant, the Civil Code. Good faith also governs the relationship; the contract does not override mandatory legal rules.

There is no general, franchise-specific obligation to provide a franchise offering circular twenty working days in advance. That provision appears in a draft decree published by the Ministry of Commerce, Industry and Tourism in 2021; a draft must not be treated as legislation in force.

You should therefore request the financial information and assumptions you need in writing and check them against the contract. Identify minimum fees, scheduled increases and obligations that could raise your calculated threshold. Ask your accountant to review the formulas and your lawyer to check that the costs in your model match the commitments you will be taking on.

Practical takeaway: before buying, express your break-even point in pesos, transactions and customer-serving capacity. If the figures only work when you leave out your own pay or assume the business will always operate at full capacity, reconsider the decision.